Death and Taxes on IT and Telecom

Benjamin Franklin said “nothing can be said to be certain, except death and taxes.” Telecom bills are subject to more than 75 different types of taxes on an invoice. The average for taxes and related fees on mobile phone services are more than two times higher than the average sales tax rates that apply to most other taxable goods and services. Telecom taxes are an easy mark for politicians to raise taxes because people don’t look closely at their bills. They don’t seem to notice the high tax burden on telecom services. Also as IT services blend with Telecom it is important to review taxes on SaaS and other categories of IT expenses.

Taxes contribute to 20% or more of the total cost for telecom bills, with 15% to 45% for mobile services and 30% for local and PBX trunks.

Listed below are some questions and information that provide unconventional thinking on ways to save money on telecom and IT taxes.

SaaS (Software as a Service) is not taxed at the federal level in the U.S., but state and local taxation varies widely depending on how SaaS is classified—as a tangible product, service, or intangible property. Here’s a breakdown:

Federal 

• No federal sales tax.

• SaaS providers are not subject to a federal sales or excise tax.

• However, income from SaaS is subject to federal income tax, like any business revenue.

SaaS Taxability by State (A Few Examples)

Telecom taxation is complex, constantly changing and prone to errors. First, it is important to determine if the tax is valid. In some states, telecommunications equipment, including services, scheduled maintenance and repairs are tax-exempt. It is not uncommon for our members to find enterprises taxed on tax-exempt telecommunications services.

Carrier Service Guides have provisions that allow service providers to “pass through” taxes and fees to collect and remit the funds to the required tax authorities. Two other common errors concern the rate at which the services are taxed and how the taxes are calculated. Some states limit the percentage of a service, which can be taxed. Potential refunds opportunities include services taxed at incorrect rates and services billed for expired fees and taxes. Some services may cross into another state or jurisdiction (i.e. wireless) during a billing period. As a result, you can be taxed for the service in both jurisdictions without apportionment.

Universal Service Fund (USF)
The Universal Service Fund (USF) is a system of telecommunications subsidies and fees managed by the United States Federal Communications Commission (FCC) intended to promote universal access to telecommunications services in the United States. The FCC established the fund in 1997 in compliance with the Telecommunications Act of 1996. Universal Service charges should not be confused with what are sometimes referred to in telephone company bills as “Federal Subscriber Line” charges, which are access fees charged by telecommunications companies, not the local or federal government.

Universal Service charges should not be confused with what are sometimes referred to in telephone company bills as “Federal Subscriber Line” charges, which are access fees charged by telecommunications companies, not the local or federal government.

Usually, service providers pass the Universal Service Fund (USF) expense to customers, but some other mobile service providers absorb the USF charges. It is also important to note that a number of enterprises negotiate exemptions with the major providers to avoid these charges. It will be interesting to see how the Supreme Court rules on USF taxes probably in late June 2025. This is one tax the Trump administration is defending to support farmers and rural voters.

Have you reviewed SIP trunking invoices?

Be prepared to evaluate two pages of tax’s and surcharges!

SIP services—because they are used to transmit voice over IP (VoIP) and often connect to the public switched telephone network (PSTN)—are typically subject to a variety of federal, state, and local taxes, fees, and surcharges in the U.S. These taxes are generally similar to those imposed on traditional telecommunications services.

SIP taxes fall into two main categories:

1. True Taxes – Sales tax, excise tax, gross receipts tax – typically remitted to revenue departments.
2. Regulatory Fees and Surcharges – USF, TRS, 911 – often mandated by telecom regulators (FCC, state PUCs).

Taxes and fees often are itemized on customer invoices:

1. Service Charges
2. Monthly SIP Service
3. Usage Charges (e.g., international calls, toll-free numbers)
4. Taxes and Fees

Federal Taxes

1. Federal Universal Service Fund (USF)
2. Telecommunications Relay Services (TRS) Fund

State Taxes

1. State Sales Tax
2. State Communications Tax
3. State Gross Receipts Tax

Local Taxes

1. County/City Sales Tax
2. Local Utility Tax

Regulatory Fees:

1. E911 Fee
2. North American Numbering Plan (NANP) Fee

These charges are usually listed as separate line items.

Below is a breakdown of what taxes and fees typically apply and how they are classified:

Federal Taxes and Fees on SIP 

• Federal Excise Tax (FET) Tax Rarely and only applies to local telephone service billed separately and not most SIP services.
• Universal Service Fund (USF) Regulatory Fee – Supports rural and low-income communications services. Typically passed through to customers.
• FCC Regulatory Fee Regulatory Fee Rare, but may apply if the provider is an FCC-regulated carrier.
• TRS (Telecommunications Relay Services) Fee Regulatory Fee Funds services for the hearing/speech impaired.

State and Local Taxes and Fees

State Sales Tax Often SIP may be taxed as telecom or data service depending on state.

• State Universal Service Fund (USF) Regulatory Fee Similar to FUSF, applies in many states.
• 911 Fees / E911 Surcharges Regulatory Fee Collected per line or trunk to fund emergency services.
• Gross Receipts Tax Tax Levied in some states on telecom revenues.
• Utility or Telecom Excise Tax Tax Applies in states treating SIP as a utility or telecom service.
• Municipal Utility Tax Tax Applied locally and may differ by city or county.

Taxes vary by state: Some states (like Texas and Florida) treat SIP a taxable telecom service; others may exempt it as a data or information service.

 Bundled Services: If SIP is bundled with non-taxable services, proper allocation is crucial to insure taxes are calculated accurately.

Tax jurisdiction is usually based on the customer’s primary use location (e.g., service address or billing address). IT PAYS TO VERIFY THE ACCURACY OF THIS INFORMATION ON THE BILL.

SIP services are subject to different taxes and fees depending on the state. Below is a summary for select states:

Florida

• State Sales Tax: 6.0%
• Communications Services Tax: 6.8% (state level) + up to 7.0% (local level)
• Gross Receipts Tax: 2.37%
• E911 Fee: $0.40 per line

Texas

• State Sales Tax: 6.25%
• Local Sales Tax: Varies by locality
• E911 Fee: $0.50 per line (state level) + additional local fees​

California

• State Sales Tax: 6.25%
• Local Utility User Tax: Up to 11% depending on the city
• E911 Fee: $0.75 per line
• Additional Fees: Various state surcharges including Telecommunications Fund, CASF, PUC, HCF, TRS, and Universal Lifeline Tax​

New York

• State Sales Tax: 4.0%
• Local Sales Tax: Up to 4.5%
• Excise Tax: 2.5%
• Gross Receipts Tax: 0.375%
• E911 Fee: $0.35 to $1.00 per line​

Illinois

• State Sales Tax: 6.25%
• Communications Tax: 7.0% (state level) + up to 7.0% (local level)
• Infrastructure Maintenance Fee: 0.6%
• E911 Fee: $1.50 per line; $5.00 in Chicago​

Pennsylvania

• State Sales Tax: 6.0%
• Gross Receipts Tax: 5.0%
• Local Sales Tax: 2.0% in Philadelphia; 1.0% in Allegheny County
• E911 Fee: $1.65 per line​

Virginia

• Communications Sales Tax: 5.0%
• E911 Fee: $0.75 per line​

Georgia

• State Sales Tax: 4.0%
• Local Sales Tax: Up to 4.0%
• E911 Fee: $1.50 per line
• 911 Cost Recovery Fee: $0.45 per line

Colorado

• State Sales Tax: 2.9%
• Local Sales Tax: Varies by locality
• E911 Fee: $0.45 to $1.75 per line
• TRS Fund Fee: $0.06 per line​

Washington

• State Sales Tax: 6.5%
• Local Sales Tax: Up to 4.0%
• Business & Occupation (B&O) Tax: 0.471%
• E911 Fee: $0.25 (state level) + $0.70 (local level) per line​

Tax rates and fees are subject to change. It’s advisable to consult with an ETMA member, tax professional or the respective state’s department of revenue for the most current information.

Do the percentages or tax rates vary on the same services?
Carriers have complex billing systems. Sometimes these systems don’t always apply the same surcharges. In some cases it is a billing error, which can provide a refund or credit. In other cases, the provider may have made a mistake in failing to collect a surcharge or tax.

Are the calculations computed from the same line items on the invoice?
The property tax surcharge can range from 2.5% to 3% of a customer’s total interstate and international charges on top of its USF. Should the USF apply to property taxes imposed by states and local jurisdictions? The USF is levied on telecom services subject to direct regulation by the Federal Communications Commission (FCC). In effect, carriers must interpret the FCC’s tax and add it to state and local property taxes for real estate and equipment. 

Ask for documentation and justification for why the tax applies.
Some vendor services are also information services that are specifically not telecom services (IP / internet access is a primary one) and therefore it is NOT subject to telecom taxes and surcharge. Ask them to explain their taxes and surcharges and to work from the tax code not their internal documents.

It pays to question validity of taxes and how they are calculated. Some taxes may seem small, but the volume and frequency means that mistakes can quickly add up. Each billing error will provide a refund or credit. It will also provide future savings through cost avoidance.

Enterprises need to file claims before the statute of limitations runs out. In addition, optimization savings opportunities through cost avoidance for telecom can produce big savings. Every day that passes when an organization fails to act because it doesn’t have the resources or a program in place means that refunds, cost avoidance and optimization savings are forfeited forever.

High tax rates make it even more important that organizations verify the accuracy of the charges on bills each month. Each billing error or lost opportunity in cost avoidance is compounded by high tax rates on telecom charges. If this is confusing or it seems there isn’t enough time to investigate the validity of taxes, issues, consult an ETMA member. Many ETMA members are well positioned to help reduce costs.